The positive volume-price (return) relationship has been intensively studied and confirmed in both financial and real estate markets, yet their theoretic models offered few direct empirical support. This paper puts forward a liquidity premium model which explains the volume-price (return) relationship by the volume-price dispersion relationship. We posit that the extent of price dispersion depends on the level of price information available in the market (measured by the volume of past comparable transactions). The model is tested empirically in two sample periods on the transactions of housing units of an estate in Hong Kong from February 1992 to September 2000 (11,267 transactions), and from May 1991 to May 2008 (18,368 transactions), respectively. The results support our theoretical prediction that the magnitude of price dispersion, as measured by the residuals of a hedonic pricing model, is negatively and significantly related with the volume of transactions in the past 10-day and 30-day period windows. It implies that an increase in liquidity reduces pricing error risk, which in turn reduces the required risk premium in buyers' offering price, and thus a positive volume-price (return) relationship.

The positive volume-price (return) relationship has been intensively studied and confirmed in both financial and real estate markets, yet their theoretic models offered few direct empirical support. This paper puts forward a liquidity premium model which explains the volume-price (return) relationship by the volume-price dispersion relationship. We posit that the extent of price dispersion depends on the level of price information available in the market (measured by the volume of past comparable transactions). The model is tested empirically in two sample periods on the transactions of housing units of an estate in Hong Kong from February 1992 to September 2000 (11,267 transactions), and from May 1991 to May 2008 (18,368 transactions), respectively. The results support our theoretical prediction that the magnitude of price dispersion, as measured by the residuals of a hedonic pricing model, is negatively and significantly related with the volume of transactions in the past 10-day and 30-day period windows. It implies that an increase in liquidity reduces pricing error risk, which in turn reduces the required risk premium in buyers' offering price, and thus a positive volume-price (return) relationship.

en_HK

dc.language

eng

en_US

dc.publisher

Routledge. The Journal's web site is located at http://www.tandf.co.uk/journals/titles/09599916.asp